Editorial Simplified: Corporate Taxes Must Be Rationalised| GS – III


Relevance: GS Paper III


Theme of the article

For kick-starting the investment cycle, the Centre has to cut tax rates for large companies.


Introduction

While the government can take pride in having pushed through the landmark indirect tax reform, it has fallen short in its efforts to rationalise corporate tax rate in the country.


Corporate tax issues

  • The corporate tax rates in India are too high when compared to those in other countries and there is widespread tax evasion, with larger companies paying lower taxes than smaller ones.
  • The gov had embarked on a roadmap for bringing down the corporate tax rate in the country from 30 per cent to 25 per cent over the next four years. However, the corporate tax rate was lowered to 25 per cent only for some companies.
  • In the tax-cut exercise, larger companies — with turnover exceeding ₹250 crore — have not seen any change in the tax rate. The tax burden for these companies has in fact moved higher.
  • Withdrawal of some of the corporate tax incentives is also increasing tax incidence for larger companies.
  • Given the inability of GST to reach its full potential in garnering tax revenue yet, the Centre is in no position to slash corporate tax rates as of now. It has instead adopted a calibrated approach to rationalising rates, in a bid to please the largest number of companies.

Global comparison 

  • Countries across the globe are moving towards lower corporate tax rates. The average corporate tax rate globally has declined from 30.19 per cent in 2003 to 20.6 currently.
  • The current peak corporate tax rate in India, at 35 per cent, is the highest among the BRIC as well as the Asia-Pacific countries.

Way forward

  • Tax on income of companies needs to gradually slide lower so that the surplus available to invest in capacity expansion and augmenting business, increases.
  • The Centre has been trying to ward off the impending cut in corporate tax rate for larger companies, it needs to do so soon. Reduction in rates for smaller companies may be beneficial to these entities, but is unlikely to have the impact that similar cuts for larger companies is likely to have in boosting private investments.
  • Corporate taxes account for around one-third of total tax collections. But instead of trying to increase revenue by holding higher rates, it could try to reduce rates, which, in some circumstances, can result in higher compliance.